The United States Supreme Court recently issued a decision in OBB Personeverkehr AG v. Sachs, 136 S. Ct. 390 (Dec. 1, 2015) which significantly limited the basis upon which a commercial entity owned by a foreign government can be sued in the United States under the Foreign Sovereign Immunities Act, 28 U.S.C. § 1601 et seq. (the “FSIA”). This decision may significantly impact certain suits brought in the US against state-owned air carriers.

Background on the FSIA

The FSIA applies in both state and federal courts in all litigation against foreign states and governments, including their “agencies and instrumentalities.” The basis for the court’s jurisdiction to hear cases against those entities is found in the FSIA, which also provides in those cases rules for service and damages available and extinguishes the right to a jury trial.

The purpose of the FSIA is set forth in 28 U.S.C. § 1602, which provides:

The Congress finds that the determination by United States courts of the claims of foreign states to immunity from the jurisdiction of such courts would serve the interests of justice and would protect the rights of both foreign states and litigants in United States courts. Under international law, states are not immune from the jurisdiction of foreign courts insofar as their commercial activities are concerned, and their commercial property may be levied upon for the satisfaction of judgments rendered against them in connection with their commercial activities. Claims of foreign states to immunity should henceforth be decided by courts of the United States and of the States in conformity with the principles set forth in this chapter.

The term “foreign state” is defined in the FSIA to include (1) a political subdivision of a foreign state or (2) an agency or instrumentality of a foreign state (28 U.S.C. § 1603). Foreign-owned airlines are “instrumentalities of a foreign state” to the extent that “a majority of [the airline’s] shares or other ownership interest is owned by a foreign state or political subdivision thereof.” (28 U.S.C. § 1603). However, if the airline is not owned directly by the foreign government, but rather is owned by a holding company that is owned by the foreign government, the airline will be deemed to have a “tiered” ownership structure and will not be immune from suit under the FSIA.

“Tiering” occurs when a foreign sovereign owns a majority interest in a holding company or other intermediary entity, which in turn owns a majority interest in the entity claiming sovereign immunity. In Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), the Supreme Court resolved a split in the lower courts and held that entities which are indirectly owned by a sovereign government are not agencies or instrumentalities of that government.

As a general matter, pursuant to the FSIA, instrumentalities are immune from suit unless one of the statute’s specific exceptions to that immunity applies. If none of the exceptions apply, the instrumentality is immune from suit and the action must be dismissed. If an exception does apply and the instrumentality may be sued in the US, the FSIA governs the handling of the proceedings.

Foreign air carriers are required to waive sovereign immunity in certain contexts in order to receive authority to fly to and from the US. Where the waiver has not been triggered, an exception to FSIA-immunity that frequently applies to foreign-owned airlines relates to the “commercial activity” of the airline, which is defined as “either a regular course of commercial conduct or a particular commercial transaction or act.” (28 U.S.C. § 1603(d)).

The “commercial activity” exception in 28 U.S.C. § 1605(a)(2) provides that:

A foreign state is not immune if the action brought against that state is based upon [emphasis added]:

(2) ... a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States;

The US Supreme Court addressed the “commercial activity” exception in OBB Personeverkehr AG v. Sachs.

OBB Personeverkehr AG v. Sachs

Petitioner OBB Personenverkehr AG (“OBB”) operated a railway that carries nearly 235 million passengers each year within Austria and to and from points throughout Europe. OBB was wholly-owned by the government of Austria. OBB—along with 29 other railways throughout Europe— was a member of the Eurail Group, which was responsible for the marketing and management of the Eurail pass program. Eurail pass holders are entitled to unlimited passage throughout the network. Passengers were able to purchase passes directly from the Eurail Group and indirectly through travel agents around the world.

Respondent Carol Sachs, a resident of Berkeley, California, purchased a Eurail pass over the Internet from The Rail Pass Experts, a Massachusetts-based travel agent. The following month, Sachs arrived at a train station in Innsbruck, Austria, where she intended to use her Eurail pass to ride an OBB train to Prague. As she attempted to board the train, Respondent fell from the platform onto the tracks. Her legs were crushed by OBB’s moving train resulting in the amputation of both of her legs.

Respondent sued OBB in federal court asserting five causes of action: (1) negligence; (2) strict liability for design defects in the train and platform; (3) strict liability for failure to warn of those design defects; (4) breach of an implied warranty of merchantability for providing a train and platform unsafe for their intended uses; and (5) breach of an implied warranty of fitness for providing a train and platform unfit for their intended uses. OBB claimed sovereign immunity under the FSIA. The parties agreed OBB was a “foreign state”, but disputed the application of the “commercial activity” exception. Specifically, OBB argued that the commercial activity exception to immunity did not apply because the suit was not “based upon” the sale of the rail pass for purposes of the 28 U.S.C. § 1605(a)(2).

In order to determine whether the action is “based upon” the commercial activity of the foreign state/ instrumentality, a court must first “identify[ ] the particular conduct on which the [plaintiff’s] action is ‘based.’” (OBB, at 394, quoting, Saudi Arabia v. Nelson, 507 U.S. 349, 356, 113 S.Ct. 1471, 1471, 123 L.Ed.2d 47 (1993)). The Nelson Court instructed that courts should look at those elements, which, if proven, would entitle a plaintiff to relief when determining what a particular claim is “based upon.”

The Ninth Circuit adopted a “one-element” test, which would require courts to look at each of the elements of all of the causes of action asserted to determine if the commercial activity made up any one element of the claim. The Ninth Circuit held that if it did, the action was “based upon” that activity.

The Supreme Court rejected this approach, holding that an action is “based upon” the “particular conduct” that constitutes the “gravamen” of the suit. Courts must “zero in on the core” of the suit to determine upon what the suit is based.

Under this analysis, the conduct constituting the gravamen of Respondent’s suit plainly occurred outside the US. In fact, “all of her claims turn on the same tragic episode in Austria, allegedly caused by wrongful conduct and dangerous conditions in Austria, which led to injuries suffered in Austria.” Respondent argued that her claims were not limited to negligent conduct or unsafe conditions in Austria, but rather involved at least some wrongful action in the United States, specifically, that OBB should have alerted her to the dangerous conditions at the Innsbruck train station when it sold the Eurail pass to her in the

United States.

The Court rejected Respondent’s attempt to sidestep the FSIA’s application through artful pleading. The Court held that “[h]owever Sachs frames her suit, the incident in Innsbruck remains at its foundation.” Therefore, the commercial activity exception did not apply and OBB was immune from suit.

Conclusion and implications for airlines

Under the Supreme Court’s holding in OBB, foreign government-owned airlines may be immune from suit in the US for their activities occurring outside the US that do not involve flights to or from the US particularly where the conduct central to the plaintiff’s claims occurs outside the US.